2003 Ruling 2003-0001013 - FORWARD CONTRACTS UNIT TRUSTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Will the proposed forward contract used by a unit trust to mimic the return of the underlying foreign fund be "foreign property" as defined in subsection 206(1)?

2. Will subsection 245(2) apply to the proposed transaction?

Position: 1) No. 2) No.

Reasons:

1. The forward contract will be executed in Canada, governed by the laws of Canada and will not be convertible into, or exchangeable for, foreign property, nor will the unit trust be entitled to acquire any foreign property under the terms of the contract. The counterparty to the forward contract will not be acting as agent for the unit trust nor will it be obliged in any way to hedge its exposure under the contract.

2. The application of subsection 245(2) to similar transactions was previously considered by the GAAR Committee and it was their view that GAAR was not applicable to the proposed transactions.

XXXXXXXXXX 							2003-000101

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)

This is in reply to your letters of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the Ruling request:

(i) is in an earlier return of the Company or a related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Company or a related person;

(iii) is under objection by the Company or a related person;

(iv) is before the courts; or

(v) is the subject of a Ruling previously issued by this Directorate to the Company or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Definitions

(a) "Cost amount" means the cost amount of property as defined in subsection 248(1) of the Act;

(b) "Counterparty" means an 'A' rated Canadian financial institution, such as XXXXXXXXXX, a Canadian corporation;

(c) "Foreign property" means foreign property as defined in subsection 206(1) of the Act;

(d) "Fund" means the proposed XXXXXXXXXX;

(e) "Trustee" means the XXXXXXXXXX; and

(f) "Underlying Fund" means the XXXXXXXXXX.

Facts

1. The Company is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act.

The Company's address is XXXXXXXXXX The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. XXXXXXXXXX. The Company is the manager of a number of publicly offered mutual fund trusts and a number of privately offered investment funds.

3. The Underlying Fund is an existing trust that is a "unit trust" by virtue of meeting the conditions in paragraph (a) of the definition of that term in subsection 108(2) of the Act. The Underlying Fund is not a "mutual fund trust", within the meaning assigned by subsection 132(6) of the Act, because it does not meet the prescribed condition in paragraph 4801(1)(b) of the Income Tax Regulations (the "Regulations") as to the number of its unitholders referred to in paragraph 132(6)(c) of the Act.

Proposed Transactions

4. The Fund will be established under a trust agreement entered into with the Trustee. The Company will manage the Fund. One unit will be issued to the Company on the establishment of the Fund for consideration of $XXXXXXXXX.

5. The Fund will be a unit trust within the meaning of paragraph 108(2)(a) of the Act but is not expected to qualify as a mutual fund trust within the meaning of subsection 132(6) of the Act because it is not expected to meet the prescribed condition in paragraph 4801(1)(b) of the Regulations as to the number of its unitholders referred to in paragraph 132(6)(c) of the Act.

6. The Fund will issue additional units to one or more sophisticated investors (the "Investors"). The Investors are expected to include registered pension plans as defined in subsection 248(1) of the Act. No prospectus or offering memorandum will be prepared in connection with any such issuance of units and, under applicable securities laws, no such prospectus or offering memorandum will be required to be delivered to an Investor or delivered to or filed with any securities regulatory body in Canada.

7. The Fund's assets will initially be invested in cash and money market instruments that do not constitute foreign property for purposes of the Act.

8. The Fund may also invest in units of the Underlying Fund provided that the cost amount of such investments and any other foreign property held by the Fund at a particular time will not exceed 30% of the total cost amount of the property of the Fund at that time.

9. The Fund will enter into a Forward Contract with the Counterparty. The arrangements relating to the Forward Contract will be governed by an XXXXXXXXXX Master Agreement (including a schedule and credit support annex) between the Company, in its personal capacity, the Company, as manager of the Fund, and the Counterparty and a confirmation thereunder.

10. The Forward Contract will relate to the value of the units of the Underlying Fund. On the settlement date, the settlement amount will be paid either by the Fund to the Counterparty or by the Counterparty to the Fund as applicable. The settlement amount will depend on the change in the net asset value per unit of the Underlying Fund between the forward start date to the settlement date net of an amount in respect of the Counterparty's notional funding cost. If the settlement amount is a positive amount, it will be paid by the Counterparty to the Fund and if it is a negative amount, it will be paid by the Fund to the Counterparty.

11. The Forward Contract will be executed in Canada and governed by the laws of XXXXXXXXXX. It will not be convertible into, exchangeable for, and will not provide the Fund with any right to acquire, units of the Underlying Fund, or create any interest in a trust. It will be settled by means of a cash payment, in Canadian dollars, only and will be subject to any risk of default by the Counterparty.

12. The Counterparty's XXXXXXXXXX parent will guarantee its obligations under the Forward Contract. The Fund will not incur any cost in connection with such guarantee.

13. The Counterparty may, but is not obligated to, hedge its obligations under the Forward Contract by purchasing units of the Underlying Fund.

Purpose of the Proposed Transactions

14. The purpose of the proposed transactions is to permit the Fund to invest in properties that will allow it to achieve its investment objective, namely, to provide investors with a return measured by reference to the performance of the Underlying Fund, while at the same time ensuring that units of the Fund are not foreign property.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:

A. Provided that at no time during a particular month does the cost amount to the Fund of all of its foreign property exceed 30% of the cost amount to it of all property held by it, the units of the Fund will not be foreign property for the purpose of computing the unitholder's taxes payable under Part XI of the Act, by virtue of subsection 5000(1) of the Regulations, in respect of that particular month.

B. The Forward Contracts described in the above proposed transactions will not be considered to be foreign property as defined in subsection 206(1) of the Act.

C. Subsection 245(2) of the Act will not apply to redetermine the tax consequences arising from the above rulings.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate